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Tag Archives: default

Despite the clear sense of despair and anger in Greece, politicians and members of the public continue to think that the alternative—default and EZ exit—would be even worse.

……Among the increasingly popular fringe left- and right-wing parties, the only party actually advocating a EZ exit is the communist party, or KKE. The KKE will have just over 10% of the vote in the election in April according to most estimates and refuses to cooperate with any other parties in a coalition. For now, the rest of the political establishment advocates doing whatever it takes to remain in the EZ.

….. most Greeks express desperation to stay in the EZ. This is reflected in recent opinion polls: according to a poll conducted in February for Skai TV and Kathimerini, 70% of respondents said a EZ exit and return to the drachma would make Greece’s situation worse and 61% said they viewed the euro favourably.

Like this:

Why not let an insolvent debtor default and invite capitalism to do its work?

That’s the process an Austro-Hungarian economist by the name of Joseph Schumpeter used to call “creative destruction”…and it has worked pretty well over the years, believe it or not…….

Consider the divergent fates of two countries that came face-to-face with a financial crisis in 1990. One of these countries is still merely muddling along…20 years later! The other country is flourishing.

That’s because one of these countries, Japan, responded to its crisis by coddling its crippled corporations and by throwing monumental sums of taxpayer dollars at failing financial institutions. The other country, Brazil, responded to its crisis with relatively savage measures. It defaulted on its debts, devalued its currency (more than once) and did not stand in the way of corporate failure. Brazil’s responses were far from perfect, but they were much less imperfect than were Japan’s……

Too bad for Japan. Its economy has muddled along for two decades, while its stock market has produced a loss of 2% per year across that entire 20-year timeframe. By contrast, the Brazilian economy and stock market have both boomed during the last two decades, despite some very serious bumps along the way.

Liquidity is an immediate issue for the banking system, but the long term issue is solvency caused by the imbalances that have grown, and continue to grow, within the European economy. Deflationary policies that have been pushed onto the periphery are making that worse….

[Economist Hans-Werner Sinn, president of the Institute for Economic Research, in Munich]: What politicians refer to as a “rescue” will not actually save Greece. The Greeks won’t ever return to health under the euro. The country just isn’t competitive. Wages and prices are far too high, and the bailout plan will only freeze this situation in place. So it’s in Greece’s interest to leave the euro and reintroduce the drachma.

As policymakers continue to grapple with the problems facing the crisis-hit countries in the euro area and the clouded outlook for the global economy, attention has turned to Iceland, which three years ago saw its entire banking system crumble in just a few days.

Private creditors ended up shouldering most of the losses relating to the failed banks, and today Iceland is experiencing a moderate recovery. Unemployment is declining, and the government was able to return to the capital markets earlier this year.

“What was seen as a disaster for Iceland three years ago is increasingly being seen as good fortune with the passing of time. Icelanders may have lost their financial system but instead they were spared the burden of nationalizing private debt,” said Árni Páll Árnason, Minister of the Economy.

The spokesman of French president Nicolas Sarkozy…. said the [Greek] move was “irrational and dangerous”. Rainer Brüderle, Bundestag leader of the Free Democrats, said the Greeks appear to be “wriggling out” of a solemn commitment. They face outright bankruptcy, he blustered.

Well yes, but at least the Greeks are stripping away the self-serving claims of the creditor states that their “rescue” loan packages are to “save Greece”. They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state, without any offsetting monetary stimulus or devaluation.

Like this:

“I expect a hard default definitely before March, maybe this year, and it could come with this program review,” said a senior IMF economist who is keeping close tabs on the situation. “The chances for a second program are slim.”

Failure of Greece to meet its targets, growing reluctance by some euro members to continue lending and the fact that private-sector participation in a second bailout won’t significantly alter Greece’s debt profile are the primary factors, the IMF official said.